Robust Monetary Policy
While there is uncertainty about the data that enter into economic models and about the parameters that govern economic models, the fact that economists often approach macroeconomic data armed with different models of the economy suggests that uncertainty, or ambiguity, about the model could also be potentially important. A policy can be made “robust” to model uncertainty by designing it to perform well on average across all of the available fully specified models rather than to reign supreme in any particular model. In this paper we compare the implications of robust monetary policy versus non robust monetary policy for a model based on a new Keynesian model with two equations that represent the dynamics of inflation and the dynamics of the output gap. Using Matlab, we are able to approximate the solution to the linear–quadratic problem associated with the estimated model, thus obtaining the optimal monetary policy decision.
Volume (Year): 2 (2008)
Issue (Month): 2 (November)
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- Richard Dennis & Kai Leitemo & Ulf Söderström, 2006.
"Methods for robust control,"
Working Paper Series
2006-10, Federal Reserve Bank of San Francisco.
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- Leitemo, Kai & Söderström, Ulf, 2008.
"Robust Monetary Policy In The New Keynesian Framework,"
Cambridge University Press, vol. 12(S1), pages 126-135, April.
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SSE/EFI Working Paper Series in Economics and Finance
499, Stockholm School of Economics, revised 15 May 2003.
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